Wage Growth Up in July, as Labor Market Strengthens

August 5, 2005 (Jobs Byte)

Jobs Byte

Wage Growth Up in July, As Labor Market Strengthens

August 5, 2005

By Dean Baker

Nominal wages grew at a 3.1 percent rate in the last quarter.

The establishment survey showed the economy adding 207,000 jobs in July. In addition, job growth numbers for May and June were revised upward by a total of 42,000, bringing the average job gain over the last 3 months to 166,000. The unemployment rate was unchanged at 5.0 percent, although the employment to population (EPOP) ratio rose to 62.8 percent, its highest level since October of 2002.

The labor market appears to have finally tightened enough to allow for some acceleration of wage growth, as the average hourly wage rose by 0.4 percent in July. The annual rate of wage growth over the last three months was 3.1 percent, compared to 2.7 percent over the last year. If this tightness persists, workers should be able to sustain wage gains that at least keep pace with inflation, and possible start to gain back some of the ground lost over the last two years.

Most of the data in the household survey supports the view that the labor market is tightening. There was an especially large improvement reported in the employment situation of blacks, with their EPOP rising by 0.6 percentage points to 58.7 percent, the highest level since September of 2002. The unemployment rate for blacks fell by 0.8 percentage points to 9.5 percent. Unfortunately, these gains did not appear to help black teens, their EPOP actually fell by 0.3 percentage points, while their unemployment rose by 0.7 percentage points to 33.1 percent.

By age group there also were some encouraging signs. Only 20.1 percent of the employment growth in July was accounted for by workers over age 55. These older workers accounted for 57.2 percent of the employment growth over the last year. However this data is erratic, so it remains to be seen whether there is a clear trend of rising employment among younger workers.

Other data in the household survey was mixed. The average duration of unemployment rose, as did the percentage of long-term unemployment, but this followed sharp declines in June - both numbers are still well below their May level. The percentage of unemployment attributable to job leavers fell to 11.0 percent, 1.3 percentage points below its May level. This drop is not consistent with an improving labor market.

The retail sector added 50,000 jobs in July, accounting for nearly a quarter of the month's job growth. This sector added 116,000 jobs over the last 4 months, after adding just 81,000 over the prior 8 months. Restaurants were also a major source of job growth in July, adding 30,000 jobs. The sector has added 262,000 jobs over the last year.

Housing continues to give an important boost to employment with the real estate sector adding another 12,000 jobs, making the job gain over the last year 73,000, or 3.7 percent. Construction added another 7,000 jobs for a gain of 270,000 over the last year.

Manufacturing employment fell by just 4,000, suggesting that the recent boost in factory orders may finally lead to some job growth in this sector. One potential indication of weakness in the establishment data is the weak performance of the temporary employment sector, which lost 2,000 jobs in July. This sector has added less than 5,000 jobs over the last 3 months. In recent years, employment trends in the temporary sector had come to be viewed as indicators of trends in the larger economy, in the belief that employers hired temporary workers before seeking more permanent employees. If this pattern holds, then employment growth may slow in future months.

Most of the news in the July employment report is quite positive, with the labor market finally having tightened enough to allow workers to be in a position to make some wage gains. However, this growth may not be sustained long enough to make up for lost ground. Higher wage growth will lead to somewhat higher inflation, as will slower productivity growth, which is likely to be shown in next week's data. If the signs of accelerating inflation lead to a rise in interest rates, then the housing bubble will start to deflate and growth will slow sharply.

Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.

CEPR’s Jobs Byte is published each month upon release of the Bureau of Labor Statistics’ employment report.